Convertible loans have become an important financing instrument for startups that need capital today but do not want to determine the company’s final valuation immediately.

A foreign investor may, for example, agree to provide:

EUR 1 million

to a Turkish technology startup today.

Instead of immediately receiving shares, the investor initially becomes a creditor.

When the startup raises its next equity financing round, the outstanding loan may convert into shares based on:

• a valuation cap;
• a discount;
• the next-round valuation;
• or another agreed conversion formula.

This structure is generally known as a:

Convertible Loan

or

Convertible Note.

Convertible financing can provide significant flexibility.

However, foreign investors should understand an important feature of Turkish law:

A contractual right to convert a loan into equity does not, by itself, bypass the corporate procedures required to issue shares in a Turkish company.

The financing documents must therefore be designed around both:

debt law

and

Turkish company law.

For foreign investors, additional questions may arise concerning:

• foreign currency borrowing;
• interest;
• withholding tax;
• thin capitalization;
• transfer pricing;
• capital increases;
• shareholders’ pre-emption rights;
• conditional capital increases;
• existing shareholder cooperation;
• insolvency;
• and the legal position of the investor before conversion.

This guide explains the main legal issues that should be considered when structuring convertible financing for a Turkish startup.

1. What Is a Convertible Loan?

A convertible loan is initially a debt.

The investor transfers money to the company.

The company becomes obliged to repay that money according to the contractual terms unless a conversion mechanism applies.

Instead of receiving repayment in cash, the investor may receive shares when a specified event occurs.

Typical conversion events include:

• a qualified investment round;
• maturity;
• a company sale;
• an IPO;
• change of control;
• or another event agreed between the parties.

A convertible loan therefore contains elements of both:

debt financing

and

equity financing.

Before conversion:

Investor = Creditor

After conversion:

Investor = Shareholder

This distinction is one of the main differences between a convertible loan and a SAFE.

2. Convertible Loan vs SAFE

Foreign investors often ask whether they should use a:

SAFE

or

Convertible Note.

They may appear economically similar because both can postpone startup valuation.

However, they are legally different.

Convertible Loan

Normally includes:

• principal;
• creditor status;
• maturity date;
• repayment obligation;
• interest or other return;
• events of default;
• and a conversion mechanism.

SAFE

Normally includes:

• no ordinary maturity date;
• no traditional interest;
• no ordinary repayment right merely because time passes;
• and an expectation of future equity.

A convertible lender therefore generally has a clearer creditor position before conversion.

A SAFE investor primarily holds a contractual future-equity right.

This distinction becomes particularly important if the startup fails.

3. Why Do Turkish Startups Use Convertible Loans?

Early-stage startups often need funding before a reliable valuation exists.

Consider a company that:

• has developed software;
• has several pilot customers;
• has not yet reached meaningful revenue;
• expects a major investment round within 12 months;
• but requires EUR 750,000 immediately.

The parties may disagree about valuation.

Founder:

“The company is worth EUR 10 million.”

Investor:

“The company is worth EUR 5 million.”

Instead of spending weeks negotiating valuation, they may agree:

Investor lends EUR 750,000 now.

If a qualified financing occurs:

the loan converts at a discount or valuation cap.

The pricing discussion is therefore partly postponed until the company has more measurable commercial data.

4. What Should a Convertible Loan Agreement Include?

A properly drafted convertible financing agreement should normally regulate at least:

• principal amount;
• payment date;
• currency;
• interest;
• maturity;
• qualified financing;
• conversion trigger;
• valuation cap;
• discount;
• conversion price;
• accrued interest treatment;
• minimum financing threshold;
• prepayment;
• investor consent rights;
• default events;
• company sale before conversion;
• insolvency;
• security;
• information rights;
• representations and warranties;
• governing law;
• dispute resolution;
• and corporate cooperation obligations.

The conversion formula should be capable of producing an exact number of shares.

A clause saying:

“The parties will determine the conversion price in good faith when the next round occurs.”

largely defeats the purpose of convertible financing.

5. What Is a Qualified Financing?

Conversion frequently occurs when the startup completes a Qualified Financing.

The agreement should define this carefully.

For example:

“Qualified Financing means an equity financing in which the Company raises at least EUR 2,000,000 from one or more independent investors.”

Why include a minimum threshold?

Because the founders should not necessarily be able to trigger conversion by arranging an artificial EUR 10,000 investment from a friendly investor at an unfavorable valuation.

Important elements may therefore include:

• minimum financing amount;
• genuine third-party investment;
• type of securities issued;
• closing date;
• and whether related-party investments count.

6. What Is a Conversion Discount?

The convertible investor usually takes more risk than investors entering the later priced round.

One way to compensate that early risk is through a discount.

Example:

Convertible Loan:

EUR 1 million.

Discount:

20%.

Series A price:

EUR 10 per share.

Convertible investor’s effective price:

EUR 8 per share.

The convertible investor therefore receives more shares than an investor contributing the same amount during the Series A round.

7. What Is a Valuation Cap?

Another common mechanism is a valuation cap.

Example:

Convertible Loan:

EUR 500,000.

Valuation Cap:

EUR 5 million.

Next financing valuation:

EUR 12 million.

Instead of converting by reference to the EUR 12 million valuation, the investor’s conversion may be calculated using the EUR 5 million cap.

The economic purpose is to reward the investor for financing the company before its value increased.

8. Can a Convertible Loan Have Both a Cap and a Discount?

Yes.

The agreement may provide that the investor receives the more favorable of:

valuation-cap price

or

discounted financing-round price.

Example:

Valuation-cap conversion price:

EUR 5 per share.

Discounted financing price:

EUR 7 per share.

The investor converts at:

EUR 5 per share.

The agreement should state this expressly.

9. Does Interest Also Convert Into Shares?

This must be specified.

Suppose:

Principal:

EUR 1 million.

Accrued interest:

EUR 100,000.

At conversion, does the investor receive shares based on:

EUR 1 million

or

EUR 1.1 million?

Both structures are possible commercially.

The agreement should specify whether:

• only principal converts;
• principal plus accrued interest converts;
• interest is paid in cash;
• or interest is waived upon conversion.

This issue can materially affect dilution.

10. What Happens at Maturity?

Unlike most SAFE structures, convertible loans generally have a maturity date.

For example:

24 months after signing.

If no financing round has occurred by then, the agreement needs to determine what happens.

Possible alternatives include:

Repayment

The investor demands principal and accrued interest.

Automatic Conversion

The outstanding amount converts using a predetermined valuation.

Investor Election

The investor chooses between:

• repayment; or
• conversion.

Extension

The parties extend maturity.

Mandatory Negotiation

The parties agree to attempt a restructuring.

A vague maturity clause can create a major dispute when the startup lacks enough cash to repay the loan.

11. Is a Convertible Loan Legally Possible in Türkiye?

A Turkish company can generally obtain debt financing, subject to the applicable contractual, corporate, foreign-exchange and tax rules.

Türkiye’s official investment guidance expressly notes that debt financing is possible and that loans obtained from abroad must be processed in accordance with Turkish banking and foreign-exchange rules.

However, the fact that a company can borrow money does not mean that conversion into shares happens automatically.

The debt relationship and equity conversion must be analysed separately.

This is the central legal issue.

12. A Loan Agreement Does Not Automatically Issue Shares

Suppose a German investor lends:

EUR 1 million

to a Turkish A.Ş.

The agreement says:

“Upon the next financing round, the loan shall automatically convert into 10% of the Company.”

Under Turkish corporate law, a private contract alone cannot necessarily create newly issued shares without the corporate actions required under the Turkish Commercial Code.

The company may need to:

• increase capital;
• amend its Articles of Association;
• obtain shareholder approval;
• deal with existing pre-emption rights;
• issue new shares;
• register the increase;
• and update corporate records.

Therefore:

contractual conversion entitlement ≠ completed corporate conversion.

13. Conversion Through an Ordinary Capital Increase

One common structure is conversion through a normal capital increase.

Under Article 456 of the Turkish Commercial Code, capital increases in an A.Ş. are subject to statutory procedures, including the relevant corporate resolution and registration requirements.

When conversion occurs, the investor may subscribe for newly issued shares.

The startup’s debt to the investor can potentially be incorporated into the capital increase structure.

Article 457 is particularly relevant because the board’s capital-increase statement expressly addresses situations where a debt is being set off, requiring information concerning the existence, validity and set-off eligibility of that debt.

This creates a legally recognizable pathway for converting an existing company debt into equity.

However, the accounting and corporate implementation should be planned carefully.

14. Conversion by Set-Off Can Be Important

Suppose the startup owes the investor:

Principal:

EUR 1 million.

Accrued interest:

EUR 100,000.

Total:

EUR 1.1 million.

Instead of:

1. company repaying EUR 1.1 million;
2. investor sending EUR 1.1 million back as capital,

the parties may seek to structure the capital subscription through set-off, subject to the applicable legal requirements.

Article 457 expressly contemplates capital-increase situations involving set-off of a debt and requires the board’s statement to address the debt’s existence, validity and eligibility for set-off.

This can make convertible financing substantially more practical.

15. Existing Shareholders Have Pre-Emption Rights

Conversion through a capital increase immediately raises another issue:

rüçhan hakkı — pre-emption rights.

Article 461 of the Turkish Commercial Code provides that each shareholder has the right to acquire newly issued shares in proportion to their existing capital participation.

Therefore, if the company wants to issue the new shares specifically to the convertible investor, existing shareholders’ rights must be addressed.

Under Article 461, pre-emption rights may be restricted or removed only where:

• justified reasons exist; and
• the required statutory voting threshold is satisfied.

The provision also prohibits using the restriction or removal to unjustifiably benefit or disadvantage a person.

This is a key execution risk for convertible investors.

16. What If an Existing Shareholder Refuses to Support Conversion?

Imagine:

Founder A: 50%.

Founder B: 30%.

Seed Investor: 20%.

Foreign Investor provides:

EUR 1 million convertible loan.

The agreement promises conversion at the next financing.

The next financing occurs.

But the Seed Investor refuses to support the corporate resolutions necessary for the planned capital increase.

The foreign investor may have a clear contractual claim but still face difficulty obtaining the promised shares immediately.

For this reason, key shareholders should often participate in the convertible-financing documentation.

They can undertake, to the extent legally permissible, to:

• support the capital increase;
• vote for necessary amendments;
• cooperate with conversion;
• address pre-emption rights;
• and sign required corporate documents.

17. Convertible Financing Should Be Coordinated With the Shareholders’ Agreement

If the company already has an SHA, it may restrict:

• borrowing;
• issuing convertible instruments;
• increasing capital;
• issuing new shares;
• granting investor rights;
• or changing the cap table.

A convertible note entered into without reviewing the existing SHA may itself breach earlier investment documents.

Before borrowing, the startup should therefore check:

Does existing investor approval need to be obtained?

This is particularly important where previous investors have veto rights over:

• financing;
• new securities;
• capital increases;
• or dilution.

18. Conditional Capital Increase Under TCC Article 463

For Turkish joint stock companies, the Commercial Code contains another potentially important mechanism:

conditional capital increase — şarta bağlı sermaye artırımı.

Article 463 allows the general assembly to provide persons who are creditors of the company or group companies because of newly issued bonds or similar debt instruments with rights to acquire newly issued shares through conversion or subscription rights.

The provision is particularly relevant to convertible debt structures.

Unlike an ordinary future capital increase that requires a new corporate implementation at conversion, conditional capital can create a pre-established legal framework for conversion rights.

19. How Does Conditional Capital Work?

Article 463 provides that the company’s capital increases when:

• the conversion or purchase right is exercised; and
• the capital contribution is satisfied through payment or set-off.

The capital increases at the time and to the extent the relevant right is exercised.

This is much closer to the commercial logic of a true convertible security.

However, conditional capital is subject to detailed statutory requirements.

20. Conditional Capital Has a Statutory Limit

Article 464 provides that the total nominal amount of conditional capital cannot exceed:

half of the company’s existing capital.

Payments must also at least equal the nominal value of the relevant shares.

For early-stage startups with very low nominal share capital, this can create a practical limitation.

Example:

Company nominal capital:

TRY 1 million.

Maximum conditional capital under the statutory limitation:

approximately TRY 500,000 nominal value.

However, startup valuations are usually based on commercial valuation rather than nominal capital.

Accordingly, the legal mechanics must be modelled carefully.

21. The Articles of Association Must Contain Detailed Conditional Capital Provisions

Article 465 requires the Articles of Association to specify matters including:

• nominal amount of conditional capital;
• number of shares;
• nominal values;
• type of shares;
• persons entitled to conversion or purchase rights;
• removal of existing shareholders’ pre-emption rights;
• privileges;
• and restrictions on transfer of new registered shares.

If relevant convertible instruments are not first offered to existing shareholders, additional matters concerning:

• exercise conditions;
• and calculation of the issue price

must also be stated.

Importantly, Article 465 provides that conversion or purchase rights granted before registration of the relevant conditional-capital provision in the Articles are invalid.

This means conditional capital is not something the parties can simply reconstruct after conversion becomes due.

The corporate structure must be planned in advance.

22. Conditional Capital Protects Conversion Right Holders

Article 467 protects persons holding conversion or purchase rights.

Their rights cannot simply be diluted through:

• later capital increases;
• new conversion rights;
• or similar corporate measures

unless appropriate protection is provided, such as:

• reduction of conversion price;
• suitable compensation;
• or corresponding treatment of shareholders.

This makes conditional capital potentially attractive for structured convertible financing.

23. Is Every Convertible Loan Eligible for Conditional Capital?

Not necessarily.

Article 463 specifically refers to creditors arising from:

newly issued bonds or similar debt instruments.

A simple bilateral loan agreement between one investor and one startup is not automatically identical to a bond or similar issued debt instrument.

The legal characterization of the proposed instrument therefore matters.

For a small seed investment, ordinary capital-increase mechanics may sometimes be more practical than building a formal conditional-capital structure.

For larger or repeated convertible financing programs, conditional capital may deserve more serious consideration.

24. Convertible Notes Can Raise Capital Markets Questions

The word “note” can cause confusion.

A private bilateral convertible loan should be distinguished from a broader issuance of debt instruments to investors.

Where the company is effectively issuing:

• bonds;
• notes;
• debt securities;
• or other capital market instruments

to multiple investors, Turkish capital-markets legislation may become relevant.

Foreign founders should therefore avoid assuming that calling a document a “Convertible Note” has no regulatory consequences.

The actual legal and economic structure matters more than its English title.

25. Foreign Currency Loans Require Separate Review

This point is particularly important for international investors.

A foreign investor may naturally propose:

USD 1 million loan

or

EUR 1 million loan.

Türkiye’s foreign-exchange framework contains restrictions on Turkish residents borrowing in foreign currency.

Official investment guidance notes that foreign-currency loans borrowed by Turkish legal entities from Turkish or foreign lenders are subject to Decree No. 32 and secondary legislation, including rules based on matters such as foreign-currency income and statutory exceptions.

Therefore, the parties should not assume that every Turkish startup can simply receive a foreign-currency shareholder loan directly into its account without further analysis.

The company’s eligibility and the banking route should be verified before funding.

26. Cross-Border Loans Should Be Processed Through the Banking System

Official Turkish investment guidance states that loans provided from abroad must be arranged through banks according to Türkiye’s foreign-exchange rules.

Foreign investors should therefore coordinate with the Turkish recipient bank before transferring the funds.

Banks may request:

• signed loan agreement;
• lender information;
• borrower corporate documents;
• repayment terms;
• interest rate;
• purpose of borrowing;
• and regulatory documentation.

Sending money first and attempting to explain its legal nature afterwards can create unnecessary compliance and accounting problems.

27. Interest Creates Tax Consequences

One reason convertible notes can be more complicated than SAFEs is interest.

Interest paid by a Turkish company to a foreign lender can trigger questions concerning:

• withholding tax;
• applicable double-tax treaty;
• corporate deductibility;
• transfer pricing;
• thin capitalization;
• VAT or banking transaction treatment depending on the structure;
• and foreign-exchange accounting.

The tax treatment depends materially on who the lender is.

A loan from:

• an unrelated foreign bank;
• foreign investment fund;
• parent company;
• shareholder;
• or individual investor

may not produce identical tax consequences.

Tax analysis should therefore be completed when the loan is negotiated.

28. Shareholder Loans Can Trigger Thin Capitalization Rules

A particularly important tax issue arises where the lender is:

• a shareholder;
• or a shareholder-related person.

Türkiye applies thin capitalization rules.

Official Invest in Türkiye tax guidance explains that, as a general principle, shareholder or related-party borrowing exceeding a 3:1 debt-to-equity ratio at any time during the accounting period can trigger thin-capitalization treatment. A different 6:1 approach may apply to certain qualifying related financial institutions.

The equity figure is generally measured according to the relevant tax rules at the beginning of the accounting period.

A foreign shareholder therefore should not assume that financing a Turkish subsidiary almost entirely through shareholder debt is tax-neutral.

29. What Happens When Thin Capitalization Applies?

Where borrowing falls within the thin-capitalization rules, tax consequences may include limitations on deductibility and potential recharacterization of certain financing costs.

Interest and related amounts associated with the excessive portion can be treated as deemed profit distributions under the applicable tax framework. Türkiye’s official investment tax materials specifically identify this consequence.

This can fundamentally alter the expected tax efficiency of the financing.

A convertible loan should therefore be modelled together with:

• current equity;
• other related-party loans;
• existing debt;
• and expected interest.

30. Transfer Pricing Must Also Be Considered

A related-party convertible loan should generally contain commercially defensible terms.

Suppose:

Parent company lends:

EUR 5 million.

Interest rate:

25% annually.

Comparable third-party borrowing would cost:

8%.

Turkish tax authorities may question whether the financing terms comply with the arm’s-length principle.

Conversely, an interest-free shareholder loan may also require tax analysis depending on the lender and circumstances.

The Turkish Revenue Administration has specifically considered the tax consequences of companies borrowing from shareholders, including interest-free and foreign-currency shareholder lending arrangements.

Convertible financing should therefore not be treated as purely corporate documentation.

31. Currency Fluctuation Can Create Significant Accounting Effects

A Turkish startup that borrows:

EUR 2 million

records a foreign-currency liability.

If the Turkish lira depreciates substantially before conversion or repayment, the TL value of that liability may increase materially.

Turkish tax rules recognize foreign-currency receivables and payables for valuation purposes, meaning exchange-rate movements can affect accounting and tax results.

This can create an unusual result:

The startup has received no additional cash, but its recorded TL liability has increased substantially.

Foreign-currency convertible financing should therefore be modelled from both:

• investment; and
• accounting

perspectives.

32. What Happens if the Company Is Sold Before Conversion?

The convertible agreement should contain a Change of Control / Liquidity Event provision.

Example:

Investor lends:

EUR 1 million.

Two years later, before a Series A round occurs, a strategic buyer offers:

EUR 25 million

for the startup.

Possible outcomes include:

Repayment

Investor receives principal plus interest.

Premium Repayment

Investor receives, for example:

1.5x or 2x invested capital.

Conversion Before Sale

The loan converts immediately before closing.

Greater-of Formula

Investor receives the greater of:

• repayment amount; or
• amount the investor would receive if conversion occurred.

The agreement should specify the intended result.

Otherwise, founders and investor may have completely different expectations once an attractive acquisition offer arrives.

33. What Happens if the Startup Defaults?

Unlike a SAFE, a convertible loan generally contains debt default mechanics.

Events of Default might include:

• failure to pay interest;
• failure to repay at maturity;
• insolvency;
• bankruptcy filing;
• material breach;
• unauthorized disposal of assets;
• cessation of business;
• fraud;
• breach of negative covenants;
• or acceleration of another major loan.

The agreement may allow the investor to:

• accelerate repayment;
• enforce security;
• claim default interest;
• or exercise another agreed remedy.

Founders should understand that convertible debt can create much greater insolvency pressure than future-equity financing.

34. Security Can Be Granted for a Convertible Loan

The investor may request security such as:

• share pledge;
• receivables pledge;
• bank-account security;
• mortgage;
• movable pledge;
• guarantee;
• or founder guarantee.

Whether security is commercially appropriate depends on the investment.

A EUR 100,000 angel note may be unsecured.

A EUR 10 million convertible bridge financing may involve substantial security.

However, security can affect later institutional financing because future lenders may object to existing investor liens.

35. Founder Guarantees Should Not Be Treated as Standard

A foreign investor may request that founders personally guarantee repayment.

That fundamentally changes the risk allocation.

Without a founder guarantee:

Startup failure risk is primarily company risk.

With a founder guarantee:

Startup failure may become the founder’s personal debt problem.

Early-stage startup founders should therefore not sign personal guarantees merely because the convertible-note template includes them.

Likewise, investors should assess whether a guarantee from a founder without meaningful assets provides real protection.

36. Negative Covenants Can Protect the Investor Before Conversion

Before conversion, the investor may not have normal shareholder voting rights.

The loan agreement can therefore include negative covenants.

Without investor consent, the company may be prohibited from:

• taking substantial additional debt;
• selling key intellectual property;
• paying dividends;
• transferring major assets;
• granting security;
• changing the business;
• entering related-party transactions;
• issuing more senior convertible debt;
• or liquidating.

These protections should be proportionate.

The investor should not attempt to manage every ordinary business decision through a loan agreement.

37. Information Rights Should Be Included

Before conversion, the investor is normally a creditor rather than a shareholder.

The agreement may therefore expressly grant access to:

• monthly or quarterly financial statements;
• current cap table;
• annual budget;
• new financing information;
• bank debt;
• tax liabilities;
• material lawsuits;
• regulatory developments;
• and proposed company sales.

This becomes especially important where maturity is several years away.

38. Most Favored Nation Clauses Can Also Be Used

Suppose Investor A enters a convertible note with:

20% discount.

Six months later, Investor B receives:

25% discount

and

EUR 5 million valuation cap.

Investor A may want the ability to obtain the better terms.

An MFN clause can provide protection against later convertible instruments being issued on more favorable terms.

The agreement should determine which terms are covered.

39. Seniority Between Multiple Convertible Loans Should Be Defined

A startup may raise several convertible rounds.

For example:

Note A:

EUR 500,000.

Note B:

EUR 1 million.

Bank Loan:

EUR 2 million.

Founder Loan:

EUR 400,000.

If the company fails, which lender gets paid first?

The answer may depend on:

• security;
• contractual subordination;
• statutory ranking;
• and insolvency law.

Convertible investors should therefore investigate existing financing before advancing funds.

40. Subordination May Be Required by Future Investors or Banks

A later bank or institutional investor may say:

“We will provide EUR 5 million only if the existing shareholder loan is subordinated.”

A subordination agreement may restrict the convertible investor from:

• demanding repayment;
• enforcing security;
• or receiving payments

until senior financing has been satisfied.

This can materially reduce the creditor protection that initially made the convertible loan attractive.

Future-financing provisions should therefore be considered from the outset.

41. Conversion Should Specify the Share Class

The agreement should not merely say:

“The loan converts into shares.”

Which shares?

Possible alternatives include:

• ordinary shares;
• same class as new investors;
• preferred shares;
• a separate investor class.

The distinction can affect:

• voting;
• dividends;
• liquidation preference;
• board appointments;
• anti-dilution;
• and exit rights.

Foreign investors should understand exactly what they receive at conversion.

42. The Investor Should Join the Shareholders’ Agreement at Conversion

The convertible agreement should address what happens when the investor becomes a shareholder.

The investor may be required to execute a:

Deed of Adherence

or

Accession Agreement

to the company’s existing Shareholders’ Agreement.

Alternatively, the next financing round may involve an entirely new SHA.

Without this mechanism, the investor could technically obtain shares while lacking key contractual rights enjoyed by other institutional investors.

43. Conversion Should Be Modelled on a Fully Diluted Basis

A startup may have:

• founder shares;
• employee options;
• SAFEs;
• convertible loans;
• warrants;
• advisor shares;
• and reserved ESOP pools.

The conversion formula should define Company Capitalization precisely.

Otherwise:

Investor believes it will receive:

15%.

Founders believe investor will receive:

9%.

Both calculations may appear mathematically correct because they use different denominators.

The agreement should specify whether capitalization includes:

• existing issued shares;
• outstanding options;
• reserved but unissued options;
• other convertible securities;
• SAFEs;
• and warrants.

44. Conversion May Produce Significant Founder Dilution

Example:

Founders:

100%.

Convertible Investor A:

EUR 1 million at EUR 5 million cap.

Convertible Investor B:

EUR 2 million at EUR 6 million cap.

ESOP:

10%.

New Series A:

EUR 5 million at EUR 15 million valuation.

Once all instruments convert and the new round closes, founders may own considerably less than expected.

A fully diluted cap-table model should therefore be prepared before the convertible note is signed.

45. Limited Companies Require Additional Caution

Convertible financing into a Turkish Ltd. Şti. can be more cumbersome than into an A.Ş.

Limited companies have different capital-increase and share-transfer rules.

Article 591 provides existing Ltd. Şti. shareholders with pre-emption rights in capital increases unless the company agreement or increase decision provides otherwise; restriction or removal requires justified grounds and the statutory voting threshold.

If conversion involves existing shares rather than newly issued shares, the formal requirements applicable to limited-company share transfers must also be considered.

For startups expecting venture financing, the company form should therefore be reviewed early.

46. Convertible Financing Can Influence Future Investors

A Series A investor will examine all outstanding convertible instruments.

It will want to know:

• principal;
• accrued interest;
• valuation caps;
• discounts;
• maturity;
• MFN rights;
• seniority;
• security;
• and conversion terms.

A badly structured early convertible note can therefore become a problem during the next financing round.

New investors may require the note to be:

• amended;
• waived;
• repaid;
• or converted on modified terms

before they invest.

47. What Happens if the Investor Wants Cash Instead of Shares?

The answer depends on the agreement.

A convertible note may provide:

mandatory conversion

at Qualified Financing.

Alternatively:

investor option to convert.

If the investor can demand repayment even during a financing round, the founders may unexpectedly need substantial cash exactly when the startup needs capital for growth.

The parties should therefore decide from the beginning whether conversion is:

• mandatory;
• optional;
• or conditional on investor approval.

48. Can the Company Repay the Loan Early?

Prepayment can undermine the investor’s expected equity upside.

Imagine:

Investor lends EUR 500,000.

Company grows rapidly.

Expected conversion value becomes extremely attractive.

Founders repay:

EUR 500,000 plus small interest

one week before the Series A round.

If unrestricted prepayment is permitted, the investor may lose the main economic reason for entering convertible financing.

The agreement may therefore:

• prohibit voluntary prepayment;
• require investor consent;
• or impose a conversion premium.

49. Convertible Loan Documentation Should Match the Economic Reality

Calling an agreement:

“Convertible Investment Agreement”

does not determine its legal character.

If it contains:

• principal;
• interest;
• fixed maturity;
• repayment;
• default interest;
• creditor enforcement;
• and security,

it operates substantially as debt before conversion.

Conversely, eliminating all normal debt characteristics while calling the instrument a “loan” may create classification uncertainty.

Turkish legal, accounting and tax analysis should therefore focus on the actual contractual rights rather than the document title.

50. Convertible Loans Can Be More Protective Than SAFEs — But Also More Dangerous for the Startup

From the investor’s perspective, convertible debt may provide:

• creditor status;
• maturity;
• interest;
• repayment rights;
• default remedies;
• and possible security.

These can make it safer than a SAFE.

From the startup’s perspective, those same provisions create risk.

If the next investment does not occur and the loan matures:

the investor can potentially demand cash repayment.

A startup with no liquidity may then face:

• enforcement proceedings;
• insolvency pressure;
• restructuring;
• or loss of key assets.

Convertible debt should therefore not be selected merely because investors are familiar with it.

Practical Example: Foreign Convertible Investment Into a Turkish Startup

Assume:

Target:

Turkish SaaS A.Ş.

Investor:

UK venture fund.

Investment:

EUR 1,000,000 Convertible Loan

Term:

24 months.

Interest:

8% annually.

Valuation Cap:

EUR 8 million.

Discount:

20%.

Qualified Financing:

Minimum EUR 3 million new equity financing.

Qualified Financing

Upon the Qualified Financing:

• principal converts;
• accrued interest also converts;
• conversion occurs at the lower of the valuation-cap price or 20% discounted round price.

Existing Shareholders

Founders contractually undertake to support required conversion resolutions.

Pre-Emption Rights

The transaction documents address the steps necessary under Article 461 for issuing the agreed new shares.

Maturity

If no financing occurs within 24 months, investor chooses between:

• repayment; or
• conversion at an agreed maturity valuation.

Company Sale

If the company is sold before conversion, investor receives the greater of:

• principal plus accrued return; or
• proceeds that would have been received following a hypothetical conversion.

Information Rights

Quarterly financial reports and updated cap table.

Negative Covenants

Investor consent required before:

• major new debt;
• sale of intellectual property;
• dividends;
• related-party asset transfers.

Shareholders’ Agreement

Upon conversion, investor joins the then-current SHA.

Regulatory and Tax Review

Foreign-currency borrowing, interest withholding and thin capitalization are reviewed separately.

This structure answers substantially more legal questions than a simple clause stating:

“EUR 1 million loan converts at a 20% discount.”

Common Convertible Loan Mistakes in Türkiye

Foreign investors and Turkish startups should avoid the following common mistakes:

1. Assuming a loan agreement automatically issues Turkish company shares.
2. Failing to define Qualified Financing.
3. Failing to define the valuation cap.
4. Failing to explain whether the discount or cap takes priority.
5. Ignoring accrued interest during conversion.
6. Failing to define what happens at maturity.
7. Failing to define what happens if the company is sold before conversion.
8. Ignoring existing shareholders’ pre-emption rights under TCC Article 461.
9. Failing to obtain contractual cooperation undertakings from controlling shareholders.
10. Ignoring the existing Shareholders’ Agreement.
11. Assuming every private convertible loan automatically qualifies for conditional capital under TCC Article 463.
12. Granting conversion rights before properly establishing a conditional-capital framework where that method is being used.
13. Ignoring Article 464’s conditional-capital limit.
14. Failing to identify the class of shares received on conversion.
15. Failing to model the fully diluted cap table.
16. Ignoring other SAFEs or convertible instruments.
17. Ignoring foreign-currency borrowing restrictions.
18. Transferring foreign loan funds without coordinating with the Turkish bank.
19. Ignoring interest withholding tax.
20. Ignoring thin-capitalization rules on shareholder loans.
21. Ignoring transfer-pricing requirements.
22. Allowing unrestricted early repayment that removes the investor’s conversion upside.
23. Accepting unrealistic personal founder guarantees.
24. Failing to consider insolvency ranking.
25. Using an international convertible-note template without Turkish-law adaptation.

Frequently Asked Questions

Can a foreign investor provide a convertible loan to a Turkish startup?

Potentially, yes.

Foreign investors can finance Turkish companies through debt structures, subject to Turkish foreign-exchange, banking, tax and company-law requirements. Official investment guidance confirms that foreign debt financing is possible but loans from abroad must comply with the applicable foreign-exchange framework.

Does the investor become a shareholder immediately?

No.

Before conversion, the investor is ordinarily a creditor.

Shareholder status arises after the relevant Turkish corporate procedures for conversion have been completed.

Can a convertible loan automatically convert under Turkish law?

A contract can create a conversion right or obligation, but actual issuance of new shares must still comply with Turkish corporate law unless a properly established statutory mechanism such as conditional capital applies.

What is TCC Article 463?

Article 463 regulates conditional capital increases in joint stock companies and allows certain creditors or employees holding conversion or purchase rights linked to newly issued bonds or similar debt instruments to acquire new shares.

Is conditional capital available for every ordinary convertible loan?

Not automatically.

Article 463 specifically refers to creditors arising from newly issued bonds or similar debt instruments. The legal characterization and structure of the instrument must therefore be examined.

Is there a limit on conditional capital?

Yes.

Under Article 464, the total nominal amount of conditional capital cannot exceed half of the existing capital.

Can existing shareholders block conversion?

Potentially, depending on how the transaction is structured.

Existing shareholders have statutory pre-emption rights under Article 461, and restriction or removal of those rights is subject to legal requirements.

This is why shareholder cooperation obligations should be addressed from the beginning.

Can the company’s debt to the investor be converted into capital through set-off?

Turkish capital-increase legislation contemplates capital increases involving set-off of a valid and eligible company debt. Article 457 expressly requires the board’s statement to address the existence, validity and set-off eligibility of such debt.

Can the convertible loan be denominated in EUR or USD?

Potentially, but foreign-currency borrowing by Turkish legal entities is regulated under Türkiye’s foreign-exchange regime and may be subject to eligibility requirements or exemptions.

The position should be checked before funding.

Are shareholder convertible loans subject to thin capitalization?

They can be.

Official Turkish investment tax guidance describes a general 3:1 debt-to-equity thin-capitalization threshold for shareholder and related-party loans, subject to specific statutory rules and exceptions.

Is interest mandatory?

No.

The parties can structure the economic return according to applicable law.

However, an interest-free related-party loan may still require tax and transfer-pricing analysis.

Is a convertible loan safer than a SAFE?

From an investor perspective, it may provide greater creditor protection through:

• maturity;
• repayment;
• interest;
• and default remedies.

However, those features also create greater financial pressure on the startup if conversion never occurs.

What happens if the company is sold before conversion?

The agreement should expressly regulate the Liquidity Event.

Possible mechanisms include:

• repayment;
• premium repayment;
• pre-sale conversion;
• or a greater-of formula.

What happens if the company fails?

The investor may remain a creditor subject to the agreement, security package and applicable insolvency rules.

Its position can therefore differ substantially from that of a SAFE investor or ordinary shareholder.

Conclusion

Convertible loans and convertible notes can be effective tools for financing Turkish startups, particularly where:

• the company requires immediate capital;
• founders and investors do not yet agree on valuation;
• a priced financing round is expected later;
• and the investor wants stronger pre-conversion protection than a SAFE ordinarily provides.

However, convertible financing in Türkiye operates at the intersection of several legal regimes.

The parties must analyse:

loan law + company law + foreign-exchange rules + tax law + shareholder rights + future financing mechanics.

For Turkish joint stock companies, the Turkish Commercial Code provides two particularly important pathways.

The first is a conventional capital increase, potentially using set-off of the valid investor debt as part of the capital subscription mechanism. Article 457 expressly addresses capital increases involving debt set-off.

The second is the conditional-capital regime under Articles 463-472, which creates a statutory framework for eligible conversion and purchase rights associated with newly issued debt instruments.

Neither method should be approached casually.

Existing shareholders’ pre-emption rights under Article 461 must also be considered.

For foreign investors, additional attention should be given to:

• whether the Turkish borrower is permitted to borrow in the proposed foreign currency;
• how the funds must enter Türkiye;
• interest taxation;
• withholding;
• thin capitalization;
• transfer pricing;
• and foreign-exchange accounting.

The fundamental drafting principle is therefore:

Do not stop at drafting the loan. Draft the conversion.

A good convertible-financing agreement should answer from the beginning:

When does conversion happen?

How is the conversion price calculated?

Does interest convert?

Which shares will the investor receive?

How will existing shareholder rights be handled?

Who must vote for the capital increase?

Can conditional capital be used?

What happens if conversion cannot be completed?

What happens at maturity?

What happens if the company is sold?

What happens if the startup fails?

Can the investor demand repayment?

What tax consequences arise before conversion?

A startup can postpone its valuation.

It should not postpone answering these legal questions.

This article provides general information regarding Turkish corporate, financing, foreign-exchange and tax law and does not constitute legal, accounting, tax or investment advice. Convertible financing should be structured according to the company’s legal form, Articles of Association, existing shareholder arrangements, financing currency, lender status, tax position and the particular terms of the proposed investment.